For bank investors, Christmas now comes twice a year. Aside from the actual holiday, the other instance arrives in March when the Federal Reserve, rather than Santa Claus, leaves goodies under the tree.

Or so hope investors envisioning higher dividends and buybacks. Yet, once unwrapped, they should closely examine their capital-return gifts, especially when they are share repurchases.

The Fed, which is due to release "stress test" findings on big banks later this week and its capital-plan decisions the following one, has favoured buybacks as the main component of capital returns. Ostensibly, in the event of trouble, it is easier for banks to scale these back without sending investors scurrying. Dividends, unfortunately, remain sacrosanct in too many investors' eyes.

Even so, buybacks often don't provide the benefit investors expect. Namely, that they will boost earnings and book value per share by shrinking the amount of stock outstanding and so dividing the profit pie into fewer slices.

First, big banks issue a lot of options and restricted stock to employees. So buybacks often only counter those, rather than meaningfully reducing the number of shares outstanding.

A sharp rise in banks' share prices last year also means firms get less bang for each buyback buck. Plus, rising share prices push a higher proportion of older options "into the money," in which market value exceeds the strike price. This raises the chance of options being exercised, expanding the share count.

Consider Wells Fargo. Over the past three years, it bought back about $11.7 billion of stock. During that time, though, its basic shares outstanding declined by only about 0.2%. And its diluted average shares outstanding increased by nearly 1%.

Wells Fargo isn't alone. When it comes to buybacks, banks are "running faster to stand still," Goldman Sachs analyst Richard Ramsden noted in a report last week. He estimated the median increase in buybacks in the coming year for banks taking part in the Fed's capital-plan reviews will be 17%, but that will boost earnings per share by just 3.2%.

This gap will be even more pronounced at firms like Wells Fargo, JP Morgan Chase, Citigroup and Bank of America. Mr. Ramsden estimates such money-center banks will increase buybacks 19%, although the boost to earnings per share will be just 2.4%.

The added twist is that those estimates of earnings accretion are on a gross basis, so they don't take into account the impact of share issuance. When that is netted out, the accretion often is nonexistent.

This adds further weight to arguments that buybacks aren't always as effective as dividends. With the latter, investors know exactly how much cash they are getting and can decide whether to reinvest. And the diminished impact of buybacks means the total yield of bank stocks, that arising from both dividend payouts and share repurchases, may be something of a mirage.

And investors already have wearying experience of how this plays out. In the run-up to the financial crisis, banks spent billions of dollars repurchasing stock that was trading at two to three times tangible book value or more. Come the crisis, banks were hoarding capital defensively and so couldn't buy back shares when they traded below tangible book value, an opportunity to purchase a dollar's worth of assets for less than 100 cents.

Given this, along with the fact buybacks often don't provide their intended benefit, the Fed should consider lightening the weight it has placed on this form of capital return. Meanwhile, investors celebrating coming capital-return decisions should be wary they haven't actually received a lump of coal.